Covid wage subsidy ‘CSI’ investigation fails revealed as judicial review application is dismissed

Monday, 6 November 2023

Prime Minister Jacinda Ardern at a Covid-19 press conference in March 2020.

An attempt to prove that the Ministry of Social Development had an unlawful practice of only prosecuting wage subsidy fraud in a limited set of circumstances has failed.

The Gama Foundation, a philanthropic organisation, applied to the High Court in Wellington for a judicial review after its founders became convinced the ministry had failed to adequately investigate, and prosecute, fraud in the Covid wage subsidy scheme.

The wage subsidy scheme was a central plank of the economic support for workers during the early months of the Covid-19 pandemic by the Jacinda Ardern-led Labour government, paying out over $18 billion in 2020 and 2021.

Justice Helen McQueen dismissed Gama’s application for judicial review, finding no evidence of unlawful decisions not to prosecute wage subsidy fraud.

However, her judgement revealed that the way the government set up the wage subsidy scheme prevented MSD from using the full arsenal of investigative powers it brings to investigating benefit fraud.

MSD’s fraud investigators work in its Client Service Integrity (CSI) service, which had around 100 trained fraud investigators, and when the wage subsidy scheme was announced, they found themselves largely dropping benefit fraud-chasing in order to investigate wage subsidy payments.

By early April, $4.8 billion had been paid out as part of the Government's wage subsidy scheme in only two weeks.

Businesses were eligible for wage subsidies if they suffered a covid-related revenue loss of at least 30%, but had to have taken steps to mitigate the covid-related impact.

Employers were to make declarations that they qualified, and would repay any money later, if they found their revenue had fallen by less.

But Gama became concerned at the small number of fraud prosecutions, concluding a “significant portion” of the $18.8billion paid out had been claimed fraudulently.

It concluded that MSD had a misguided interpretation of the Crimes Act, meaning that in many cases, businesses which got wage subsidies they did not qualify for were not prosecuted.

This included cases where businesses had claimed money, but not later paid it back when they found their revenues had fallen by as much as 30%, despite this being “continuing offences”.

And, Gama argued, they also included cases where MSD considered it did not have enough evidential support.

Christchurch philanthropists Grant and Marilyn Nelson.

Gama, set up by philanthropists Marilyn and Grant Nelson, argued that the lack of evidential support in many cases was the result of MSD’s own failings and shortcomings.

MSD denied it had an “unwritten unlawful practice” only to prosecute in a limited set of circumstances.

It argued Gama was simply unhappy with the way in which resources were allocated in the investigation and prosecution of criminal offending.

McQueen found the wage subsidy scheme was a high-trust scheme, which Gama described as a “pay and walk away” scheme.

MSD would not check eligibility before paying the subsidy, but could “audit” later.

Essentially, it required business owners to declare they were qualified and make undertakings in return for getting the money, including that they would provide information to the extent required by MSD in the case of it deciding to audit them.

But MSD’s defence to Gama’s allegations indicated the way the Ardern government had set up the wage subsidy scheme left it without key investigative powers.

Parliament did not create a statutory framework for the wage subsidy scheme, McQueen found. All the iterations of the wage subsidy scheme were established by Cabinet decision and sat outside the Social Security Act 2018.

“This had implications for the powers MSD could use in the administration of the schemes, as it could not use its powers under the Social Security Act to obtain information from persons or businesses who applied for the subsidy,” McQueen said.

Broadly, McQueen said, MSD was required to obtain information from businesses by consent, or through memoranda of understanding with other government agencies.

It could also collaborate with the Police to seek production orders under the Search and Surveillance Act 2012, but only started doing so in December 2020, and it wasn’t until February 2021 that it created a Recovery and Response Panel to make decisions on who to prosecute, or to take civil claims against.

But Gama said MSD’s audits did not even require businesses to provide proof their revenue fell by 30% in the form of financial statements.

In May 2021, the government Auditor-General published a critical report, which found MSD’s post-payment checks were less than what cabinet would have expected. It appeared MSD’s checks were in many cases verbal, and did not, in many cases, involve it asking for documentary evidence, including financial accounts.

However, even with MSD’s shortcomings, McQueen found Gama had not proved MSD had done anything except use its legal discretion on which cases to prosecute.